Friday, March 25, 2016

Achieving Meritocracy in the Workplace

Knowing what we do about the gender wage gap and implicit bias in the workplace, what sort of measures could we take to improve pay equity? Could a meritocratic system, with pay based strictly on performance, be the answer?

This week’s WAPPP seminar featured Emilio Castilla, NTU Professor of Management at the MIT Sloan School of Management (during his spring break, no less!). Professor Castilla’s work focuses on the social aspects of work and how social and organizational processes influence employment outcomes – with important managerial implications.

Performance-reward practices are now standard within most industries – 69% of organizations offer variable bonuses based on performance, and some type of merit pay exists in almost all companies. If these pay practices are truly meritocratic, demographics shouldn’t matter. However, the gender and racial implications of merit-based employer efforts are not well understood – do these company practices improve workplace equity and diversity?

In theory, if merit pay was based solely on performance, we would see similar levels of pay for men and women at each performance rank. However, one of Professor Castilla’s studies showed that the benefits of a higher performance rank were much greater for men than for women. A man’s performance bonus was significantly larger than a woman’s at the same performance level, and the gender gap increased the higher the performance quintile.

Skeptics may argue that women may have less experience than men, may be less productive than men, or may not ask for bonuses. To test these assertions, Professor Castilla conducted a company field study of performance rewards over time. There was no evidence in the company that women or minorities received lower starting salaries than white men within a given job and work unit. However, there was evidence of performance-reward bias. Even with the same performance scores, women and minorities with the same job, work unit, supervisor, and human capital received lower salary increases than white men. This study provides some evidence that in trying to close the gender wage gap, we should really be looking at the processes and outcomes surrounding bonus pay.

The key question in thinking about organizational processes is whether the gender gap exists because of or despite employer meritocratic efforts. What is the alternative to performance-based pay? If we eliminated merit pay, would we see no bias? Or are these results better than what we had under traditional systems?

To answer these questions, Professor Castilla took to the lab. Participants were given a limited budget of $1,000 to distribute among employees in bonuses. In the meritocratic condition, participants were given performance evaluations of each employee and were told that this was the only criterion for distributing bonuses. In the non-meritocratic condition, participants still had access to performance evaluations, but were told that it was up to the manager’s discretion to distribute bonuses. In addition, researchers varied the gender of the employees to be evaluated, who each had equal performance ratings. In the non-meritocratic condition, participants awarded male and female employees about the same level of bonus, with no statistically significant difference (on average, women received about $399 and men received $401). Shockingly, in the meritocratic condition, there was an enormous gender gap in favor of men. Men received about $420 in bonus pay in the meritocratic condition, compared to $374 for women. Professor Castilla calls this the paradox of meritocracy—in an organization that emphasizes meritocracy in its culture, without specific structures or processes in place, bias is even greater.

Demographic inequality persists despite employer merit-based efforts. This finding is consistent with “moral credentialing” – in contexts where people are led to feel unbiased, fair, or objective, they are actually more likely to then behave in biased ways. By making employees feel like they’re working in a meritocracy that strictly evaluates performance, they are more likely to unleash bias. This is true for both male and female study participants distributing bonuses!

Organizational practices and processes matter, and there is unlikely to be only one solution to bias in the workplace. Still, it is critical to investigate which employer practices help to reduce workplace inequality and increase diversity. Professor Castilla undertook one large firm-level study designed to empirically test whether introducing organizational accountability and transparency policies reduced any pay gap based on employee demographics. Performance management at this company was a three-step process: supervisors met with employees once a year to discuss their performance and provide feedback, but were not responsible for setting compensation. This step is characterized by high accountability and transparency: the supervisor is responsible for providing feedback, and the employee has to acknowledge receiving the feedback and register their reaction to it. However, steps two and three are less visible. In step two, compensation is decided at the work unit level, and in step three HR rubber stamps the work unit’s decision. The key intervention here would be to increase accountability and transparency in steps two and three.

The company created a Performance-Reward Committee that Professor Castilla emphasized was a task force in the truest sense of the term: they had a defined task and the force to intervene if they found any evidence of pay discrepancy and bias. Once compensation-setters had to be accountable and visible in terms of their process and outcome, demographic variables played no significant role in bonus pay. Instead, performance ratings became even more statistically significant.

Professor Castilla’s work illustrates some of the critical challenges faced by employers. Meritocracy is harder than it looks! Merit-based efforts can activate implicit bias above and beyond traditional processes. However, Professor Castilla emphasizes, the key lesson here is not “we shouldn’t adopt practices to increase fairness and equity.” Instead, we should pay close attention to implementation, accountability, and transparency.

Read the paper:

The Paradox of Meritocracy in Organizations
Authors: Emilio J. Castilla Stephan Benard Organizations that emphasize merit-based cultures, while intending to increase opportunities, fairness, and equity, may inadvertently be disadvantaging women.